The Cooper Companies, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2020. Unaudited results are compared with the corresponding 2019 periods. The company operates CooperVision, a contact lens business, and CooperSurgical, focused on women’s health, fertility, diagnostics and contraception. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales | $524.9; down 20% from $654.3 | $1,171.1; down 9% from $1,282.4 |
| Gross profit / margin | $323.5 / 62%, versus $432.6 / 66% | $750.0 / 64%, versus $851.1 / 66% |
| Operating income / margin | $28.6 / 5%, versus $146.9 / 22% | $139.7 / 12%, versus $257.8 / 20% |
| Net income | $11.5, versus $122.4 | $102.0, versus $225.5 |
| Diluted EPS | $0.23, versus $2.45 | $2.05, versus $4.52 |
| Operating cash flow | $25.8, versus $214.8 | $155.5, versus $316.6 |
| Capital expenditures / free cash flow | $89.3 / $(63.5) | $158.3 / $(2.8) |
Quarterly revenue fell in both businesses: CooperVision sales were $402.2, down 17%, and CooperSurgical sales were $122.7, down 28%. CooperSurgical reported an operating loss of $25.6 for the quarter; CooperVision operating income was $67.7. For the six months, CooperVision operating income was $190.6 and CooperSurgical reported an operating loss of $23.9.
Balance sheet, debt and liquidity
- At April 30, cash and cash equivalents were $79.8; working capital was $140.9. Current assets were $1,166.2 and current liabilities $1,025.3.
- Total debt was $1,899.3, compared with $1,826.3 at October 31, 2019. The filing reports debt-to-equity of 0.52:1 and debt at 34% of total capitalization.
- The April 2020 credit agreement provides a $1,290 revolving facility and an $850 term loan, each maturing April 1, 2025. At quarter-end, $495 was drawn on the revolver, with $793.8 available after letters of credit. A separate $500 term loan matures September 25, 2020.
- The company said it was in compliance with debt covenants: leverage ratio 2.18 against a maximum of 3.75, and interest coverage 15.00 against a minimum of 3.00. Management expected cash, operating cash flow and available credit to meet anticipated needs for at least 12 months from issuance of the financial statements.
- Inventory increased to $568.2 from $506.9; inventory months on hand rose to 8.5 from 6.4. Days sales outstanding rose to 67 from 56.
Material changes and unusual items
- Management attributed the sharp sales and earnings decline primarily to COVID-19: customer closures and access restrictions, deferred or cancelled procedures, lower patient visits and reduced purchasing. Revenue pressure affected both businesses and all CooperVision regions.
- COVID-related production costs, including unabsorbed fixed overhead, labor inefficiencies and higher manufacturing and freight costs, weighed on gross margins. Management quantified related costs at $16.2 for CooperVision and $5.9 for CooperSurgical in Q2.
- Prior-year Q2 operating results included a $19.0 gain from selling an exclusive distribution right for $21.0; there was no comparable gain in 2020.
- Interest expense declined to $12.8 from $18.5 for Q2, and to $24.4 from $36.6 for the six months, principally reflecting lower average debt and interest rates, partly offset by debt-cost write-offs.
- The company refinanced credit facilities on April 1, 2020, repaying borrowings under prior agreements. It recorded debt extinguishment charges of $1.4 and $0.8 for the terminated facilities. On April 6, it entered into six interest-rate swaps with $1.5 billion aggregate notional value; the swaps produced a $13.5 after-tax loss in other comprehensive income.
- The company adopted lease accounting Topic 842 on November 1, 2019. At April 30, operating lease right-of-use assets were $255.5 and lease liabilities $264.2.
Outlook, commentary and risks
Management remained optimistic about long-term prospects in contact lenses and general health care but did not provide numerical earnings or revenue guidance. It warned that COVID-19 and related economic disruption were likely to continue adversely affecting sales, cash flow and performance, with duration and severity uncertain. The company reported no significant manufacturing, supply or distribution disruption as of the filing date, but noted higher production and freight costs.
Other highlighted risks include a possible deterioration in liquidity or debt-covenant capacity if conditions worsen; foreign-exchange and variable-rate debt exposure; LIBOR transition uncertainty; international, regulatory and Brexit-related risks; supply-chain interruptions; litigation and cybersecurity threats. A $500 term loan was due in September 2020. The company had $54.3 of unrecognized tax benefits, of which $14.5 could possibly be settled within 12 months. The contact-lens pricing-policy class action settlement received final court approval in March 2020; the company stated other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How quickly optical retailers, hospitals, medical offices and fertility clinics resume normal activity, and the resulting recovery in sales and margins.
- Whether elevated inventory, receivable collection times and negative free cash flow normalize as demand changes.
- How the September 2020 $500 term loan is repaid, refinanced or otherwise addressed, and whether covenant headroom remains adequate.
- The impact of interest-rate swaps and LIBOR transition on future interest expense and cash flows.
- Whether COVID-19, tax audits, foreign exchange, regulatory changes or other contingencies lead to material future charges or liquidity needs.